Fast Comment USFed on course for rate hike in December

Minor tweaks to press statement; Fed on course for rate hike in December

We expect the Fed to continue to raise rates once a quarter; midterms do not change the outlook

Fed leaves rates on hold, as expected

As widely expected, the Fed maintained the target range for the federal funds rate at 2.00-2.25 percent at the FOMC meeting that concluded today. The vote was unanimous. The meeting was not followed by a press conference or update on the economic projection, so the communication was limited to the press release, which contained little new information. This is the final meeting with no scheduled press conference; the Fed chairman Jerome Powell will answer questions after every meeting starting next year.

Minor tweaks to press statement; Fed on course for rate hike in December

The changes to the press statement were minor, as incoming data on economic activity has provided little reason for the Fed to change its outlook. Some modest changes to the descriptive language acknowledge the recent data (the unemployment rate has “declined” rather than “stayed low”; fixed investment “has moderated from its rapid pace earlier in the year” rather than “has grown strongly”), but there are no substantive changes to the rest of the text. As widely expected, the statement did not comment on the recent stock market turmoil. With the latest data showing that activity has continued to expand at a rapid pace, we believe it would take much more serious stock market weakness for the Fed to reconsider its plans for further interest rate hikes. All in all, everything points to the next hike taking place in December, which is also largely priced in by markets.

We expect the Fed to continue to raise rates once a quarter; midterms do not change the outlook

The labour market is tight and there are signs that wage pressure is building. Additionally, inflation has increased, and core PCE inflation is now running at the Fed’s two percent target. That should keep the pressure on the Fed to continue raising interest rates once a quarter, we believe. We expect the Fed to hike the fed funds rate in December and twice in 2019 (March and June). By that stage, we think weaker growth will prompt the Fed to move to the sidelines, with the next step likely to be rate cuts in 2020. The midterm elections are unlikely to have a significant bearing on the economy in the near term, in our view. However, given the outcome of the midterm elections, with a divided Congress, we should expect the next couple of years to bring legislative gridlock. The chances of further fiscal stimulus next year and 2020 are therefore low.